He sees only slight improvements in AT&amp;T earnings this year. In fact, he has trouble getting thrilled about profits over the next few years. ``The long-distance and communications equipment divisions will be earning normal returns. The real growth must come from their new businesses [such as personal computers, international joint ventures, and networking equipment] which will take a long time to develop,'' says Mr. Schelke.

Indeed, AT&amp;T is going through a rough transition period. It's no longer the only kid on the block. In some areas now it's not even the biggest kid on the block. The federal government's forced divestiture is pushing AT&amp;T into a position of having to invest and compete with the agility of a young entrepreneurial enterprise. That's a significant shift for a monopoly-grown management. Most analysts no longer put AT&amp;T in the same box with conservative widow-and-orphan utility stocks.

``It looks like AT&amp;T is going to go through more pain before they can be flexible enough to react to the competition and be a success,'' says Frank E. Plumley, Standard &amp; Poor's telecommunications analyst. He's ``neutral'' on the stock over the next two to three years. And near term, he adds, ``I wouldn't own it. You're likely to be in for a few disappointments over the next year.''

Diminishing long-distance market share is part of the problem. As competitors such as MCI Communications Corporation, GTE Corporation (Sprint), and a slew of other companies gain equal access, AT&amp;T loses thousands of long-distance dialers. Value Line Investment Survey reports that AT&amp;T market share has fallen from 96 percent to 75 percent in areas where equal access has become available.

Of course, this is what divestiture is all about. And Plumley believes the government is committed to the process. ``If the government is going to act to encourage competition, AT&amp;T is going to suffer. It did not deregulate AT&amp;T so its market share could drop one year and be back up to 99 percent the next.''

But before you rush off and sell any AT&amp;T stocks you may have, give Frank J. Governali an opportunity to change your mind. This particular Kidder, Peabody &amp; Co. analyst sent out a clear buy recommendation on AT&amp;T in March.

The gist of his argument: There's nowhere to go but up. ``1984 was such a bad year -- everything that could go wrong did. For them to show improvements in '85 and beyond takes very little change in their operations and the regulatory area.'' Earnings per share in 1984 were $1.25, and the dividend yield weighs in at about 6 percent -- ``a nice downside cushion,'' comments Mr. Governali. He estimates this year's earnings will hit $1.80, and by 1989 is predicting $3.54 a share.

He allows that AT&amp;T will continue to lose ground in the long-distance market. But there are signs of improvement in other divisions.

AT&amp;T Technologies, the communications-equipment segment, has stopped losing money, says Mr. Governali. He looks for a slight boost in the profit margin there. Other analysts concur that AT&amp;T will probably regain some of the private branch exchange (PBX) business captured by Northern Telecom last year.

AT&amp;T's finances will also benefit from a decline in access charges and reduced billing and collection expenses. Governali says last year AT&amp;T paid the regional holding companies $3 billion for collecting the bills for such services as AT&amp;T's WATS lines and information. Soon, AT&amp;T will bill the customer directly. This will allow the long distance giant to control and, ideally, reduce the costs of billing customers for these services.

But what about that long-distance market? If the goverment is cutting up AT&amp;T's pie and competitors are grabbing for slices, what are the investment prospects here?

Not terribly promising, analysts say. The upside: AT&amp;T is giving up customers and more people overall will be tying up lines with long-distance chats (an estimated 5 to 6 percent more every year).

The downside: Despite the growth of the market, too many carriers will be scrounging for too few new customers. The resulting price wars are reducing everyone's profits to nil or almost nil.

``There's no question a shake-out lies ahead,'' says Smith, Barney's Mr. Schelke. ``We'll be left with three or four companies of any size'' in the long-distance market. His list includes AT&amp;T, MCI, GTE, perhaps United Telephone (now spending $2 billion on a national fiber-optics network). He also suggests a consortium of regional companies could pool resources to set up a long-distance service.

As for investing in survivors, GTE lands on Schelke's speculative list. At an analysts meeting a month ago, ``Essentially, not directly, GTE said they were planning on spending $1 billion on Sprint and their Spacenet this year,'' says Schelke. That is a huge capital outlay. But he's disturbed by what he perceives as a lack of management commitment to long distance. ``Two years from now they could have $3.5 billion sunk in a business they don't have a real commitment to,'' he says.

But the attitude of staying loose and selling the Sprint operation if the going gets rough is precisely what Mr. Governali likes about GTE. ``They're not emotionally committed to Sprint. They're committed to making rational financial decisions. They would pull out, sell, or bleed it to get their money out if they need to.''

As for MCI, Schelke at Smith, Barney would avoid the stock. But if he owned shares he'd wait for the results of a $1.8 billion restraint-of-trade suit filed against AT&amp;T and due in court in April.

Suit or no suit, Allan Lyons, telecommunications analyst at Value Line, isn't keen on MCI or any of the long-distance carriers. ``Over the coming two years, as equal access spreads, the costs for these carriers will rise dramatically [MCI's access expenses will more than double] while AT&amp;T's access costs will come down. Then AT&amp;T will lower its prices, and everyone's margins will shrink. This will become a dog-eat-dog business, just like the airlines,'' Mr. Lyons predicts.

Where does one find the stable, growing, income-generating companies? Analysts champion Ma Bell's fledglings. The regional holding companies chalked up 18 percent gains last year. While some of the RHCs lagged in the January Wall Street rally, these stocks are expected to eke out a better performance than the market as a whole in 1985.